ABSTRACT: This paper models how exclusionary bundling motivates mergers. Firms in
two unrelated markets may want to merge only to bundle, even though
bundling is possible without a merger. This is because merger is
necessary in order to use bundling for an exclusionary purpose.
Independently of a merger, firms can always improve their profits from
pure bundling. In contrast, a merger is never profitable if not
combined with bundling. Moreover, it is more profitable to bundle
through strategic alliance than through merger in the short run. Thus,
firms choose to merge only if the merger can lead to foreclosure.
Although the merger results in losses to a rival in only one of the two
markets, foreclosure occurs in both markets, since the other rival firm
alone cannot compete against a bundle. In this framework, all mergers
are ex ante anti-competitive. Blocking a merger is never
welfare-reducing.